Wednesday, August 15, 2012

The mismeasure of inequality

Kip Hagopian and Lee Ohanian have a wonderful new policy review titled "the mismeasurement of inequality." Calmly, and with careful grounding in facts and review of research, it destroys most of the current liberal myths about the amount of inequality and its importance. The promise:

We will show that much of what has been reported about income inequality is misleading, factually incorrect, or of little or no consequence to our economic well-being. We will also show that middle-class incomes are not stagnating; in fact, middle-class incomes have risen significantly over the 29 years covered by the cbo study. Lastly, we will address assertions that the rich are not paying their “fair share” of taxes

"Address" should be "destroy", but they're being careful. Some nuggets:

Standard measures of inequality are based on pretax cash income, ignoring transfer payments from the government, goods provided directly (housing), benefits (health insurance, retirement contributions), all home-produced goods, and focus on income rather than consumption, which is often suspiciously higher than reported income. Kip and Lee do their best. When done, the increase in inequality disappears.

Looking at consumption (though still imperfect, as it leaves out home production) yields surprising results:

In 1960–61 consumption expenditures in the lowest quartile were 112 percent of reported income, rising to 140 percent (in the lowest quintile) in 1972–73, and 198 percent (in the lowest quintile) in 2005. Thus, a family claiming $22,300 in income in 2005 would have reported about $44,000 in expenditures in that year. ... the gap between reported income and consumption is filled by various categories of government transfer payments (including Medicaid, food stamps, subsidized housing, the Earned Income Tax Credit, Temporary Assistance for Needy Families, etc.), family savings, imputed income from owner-occupied housing, barter, support from family and friends, and income from the underground economy.

The poor did not get poorer, or stagnate.

..on average America’s poor live in housing that totals 515 square feet per person, about 40 percent more per person than the living quarters of the average European household. (The average American household lives in about 845 square feet per person, or 2.3 times the average European household.)

In addition to food, clothing, and shelter, some of the most meaningful indicators of well-being are the properties and amenities that make life more comfortable or enjoyable. Based on data from the 2009 “American Housing Survey,” Rector and Sheffield report that 42 percent of poor households own a home (median price: $100,000); 80 percent have air conditioning; 98 percent have a color tv (65 percent have two or more); 99.6 percent have a refrigerator; 98 percent have a stove and oven; 75 percent have a car or truck (31 percent have two or more); 81 percent have a microwave oven; 78 percent have a dvd or vcr; 64 percent have a satellite connection; and 25 percent have a dishwasher.

Our purpose is not to make light of the deprivations the poor suffer every day. [My emphasis. Liberals always try to say "you don't care" because you don't want to swallow the latest scheme.] There is no doubt that the poorest Americans struggle mightily, and that too many Americans are poor. But these data are useful in understanding the difficulties in defining poverty, and for constructing effective policies aimed at helping those in need

Since "are we becoming Europe?" and "how bad is that really?" are often in the news, a fact based comparison is interesting

...the U.S. has a significantly higher standard of living than almost all of the most advanced economies. According to “The Luxembourg Wealth Study,” the data source used by the oecd for international comparisons, in 2002 (the latest year for which results were available), median disposable personal income in the U.S., adjusted to reflect purchasing power parity, was 19.3 percent higher than in Canada; 68 percent higher than in Finland; 45 percent higher than in Germany; 59 percent higher than in Italy; 31 percent higher than in Norway; 73 percent higher than in Sweden; and 31 percent higher than in the United Kingdom.

Europe doesn't look so bad when you go visit? Answer: averages matter. Not every body lives on the Via Veneto, dear tourist.

The figures for gdp per capita and median income understate America’s economic performance advantage because the median age of the U.S. population (36.8 years) is about four years lower than the average median age in the European Union and almost eight years lower than in Japan. Age, as a proxy for experience, is a significant contributor to income until individual earnings peak sometime between age 50 and 55.

A good point I hadn't thought of.

Taxes, and "fair share"?

The U.S. income tax system is, by any measure, quite progressive. In fact, according to a study released in 2008 by the oecd, the U.S. federal income tax system is the most progressive of any of the 24 countries in the “oecd-24,” which includes Canada, Japan, Australia, and all of the richest European nations: Germany, France, the United Kingdom, Italy, the Netherlands, Norway, Switzerland, Luxembourg, and Sweden. In fact, the U.S. progressivity index is 22 percent higher than the average for the 24 countries...

In addition to economic efficiency considerations, we believe that taxing any income from savings and investment is inequitable. Here’s why: Assume two people, Angelina and Brad, have exactly the same lifetime earned income, but Angelina saves ten percent of her after-tax income and Brad saves nothing. In this hypothetical, if income from savings is taxed, Angelina will pay more lifetime tax than Brad, simply because Angelina saved. We believe this is clearly inequitable.

Angelina will also get a lot fewer government benefits. She'll pay more college tuition, get less out of social security, have all her subsequent income taxed at higher marginal rates, and so on. (Investment income may not be taxed that highly iteslf, but it pushes you into a high adjusted gross income bracket and then makes your other income subject to more taxation.)

So what is a “fair share”? The U.S. tax system is more progressive than that of any other advanced economy. Higher-income workers already pay a substantially disproportionate amount of the income tax relative to their share of income. The top five percent pay 44 percent more in taxes than the bottom 95 percent, while 47 percent of tax filers pay no tax at all. The bottom 50 percent of filers pay only 2.3 percent of taxes, and the bottom quintile gets money back.
Based on these facts, how does one make a case that the rich are not paying their fair share?

OK, as they admit, nobody has defined "fair," still well written.

I prefer cause and effect, positive analysis. Will redistribution through taxation make us better off, or consign us to egaliatrian misery? I want to raise the living standards of less well off Americans every bit as much as my lefty colleagues. Will redistribution help them or leave them worse off?

We are unaware of persuasive evidence that reducing income inequality will increase economic well-being for the majority of citizens; in fact, America’s superior standard of living and economic growth relative to other advanced economies is evidence to the contrary.

For arguably the most commonly used measure of inequality and for the Census Bureau’s most comprehensive definition of income, inequality has not risen since 1993. Moreover, the rise in income inequality that occurred before that year appears to have been, at least in part, a byproduct of the remarkable success of a group of entrepreneurs who in the past few decades created countless jobs and contributed substantially to the higher living standards we all currently enjoy.
..

A final cheer:

Rather than focusing on income inequality, policymakers should address the very real impediments to achieving equality of opportunity, particularly for the youngest and least-skilled workers among us. We believe such efforts should begin with fixing our k-12 education system, which is failing to train many young Americans to be competitive in today’s global labor market. If we can solve this problem, we will enable future generations of young people to climb the economic ladder and achieve the economic success that has long made the United States the world’s leading economy

Yes. What the public education system in this country has done to the poor and less well off is a scandal (I don't like the term "middle class," as I reject the idea that we are a class-based society).

I'm not doing justice to the careful argument in the report. Go read the original

44 comments:

When I hear that consumption inequality is lower than income inequality, I'm not necessarily that comforted if lower wealth household are having to finance this consumption through borrowing or dissaving. Has there been research into that question?

Isn't personal disposable income quite a poor statistic for comparison between countries, considering that it doesn't include government spending? Obviously the US does better than Norway in such a comparison, but not because the US is richer (Norway has higher GDP PPP per capita than US) but because Norway has a bigger government than the US, providing free healthcare and other services.

A thought regarding progressivity of the US tax system: could this perhaps be attributed to the fact that in countries such as Denmark, you pay tax off government transfers (which are obviously quite high) whereas in the US you generally don't pay taxes off ex. Social Security.

The fact of the matter is that the high-end income tax rate is significantly lower in the US than in most other developed countries, the same is true for the capital gains tax(at least compared to European countries). Also if you look at the gini coefficient, it's risen significantly in the US the last 20 years and is quite a bit higher than in most other developed countries.

It's fair enough to have a debate about what to do about inequality (completely agree with your argument regarding public education - change in drugs laws is another thing I think could benefit poor people as well), but it seems unnecessary to start by denying the existence of inequality?

I doubt anyone is denying inequality. The article quoted here proves only one thing beyond doubt and that inequality is not being measured properly. There are too many interesting data points here but it is interesting to note that it is Greece that has reduced inequality the most.

Reducing inequality is the easiest thing to do on Earth. What this article is hinting at is that there is a cost to doing it and people need to know what they are.

And I find any comparison between US and random small countries in the Europe as hilarious. Greece is now a basket case but reduced inequality the most. Denmark owns Greenland and has much higher per capital oil production and much less consumption for a population of 5 million. Norway is the biggest producer of oil there. There is rampant unemployment and many countries are on the brink of bankruptcy.

Broadly by nearly all measures the US is doing better than Europe and all this article is hinting is that in the only measure it is supposedly doing worse the calculations are seriously messed up. So is it a reasonable price to pay ?

One fact I am certain of.I went to my 20 year high school reunion. We did a survey and found that 20% of us were attempting to buy homes. The rest never saved enough to make a down payment. This at the max of the housing boom. The prevailing attitude was that home ownership was no longer a goal for the majority of us. I am sure you understand the mathematics in equity and retirement planning. After the results of this survey we talked among each other and found that our parents got raises in the 80s and 90s. Not one of us 600 who attended ever got a raise. Not one ever asked for a raise. Asking for a raise was something only baby boomers did because they held equity. Enough to tide them over till their next job. None of us had retirement accounts, because in order to keep up with inflation of rent prices we had to quit jobs on average every 4 years to make our IPO. The average age of marriage was 30+. 70% went on to college after high school and only those whose parents paid for college 7 or 10 of us were not falling deeper in debt due to rent prices priority over paying off debt. The debt had not decreased at all for most of us. That was 15 years ago. I lived in Denver Colorado. The article you commented on was selective in it's perspective. I did read it. This is a case of the ivory tower not getting out and doing real research. More government stats. And government stats are always wrong. By design.http://www.cityfactsusa.com/

O, I have consistently read your comments. You are so lacking in judgment you are unemployable. YOu are were you are due to republican economics. Go read Noah Smith, who documents that the country broke in the 1970s.

What the public education system in this country has done to the poor and less well off is a scandal . . .

Amazing claim. I have never seen, meet, or heard of any person who has been deprived of anything if they are given an opportunity to sit in a classroom, library, or laboratory and study and learn to their hearts content.

That is interesting. I see lots of international students coming to US and get good scholarships. They earned degrees in electrical engineering computer science and then worked for companies like google intel Microsoft. They never complained about US education and often times they felt lucky to have a chance to study in US and learned the skills. Sometimes people just need some self esteem not to blame others and work harder.

US university education is the best in the world. We're talking about the awful state of US K-12, where namby pamby garbage peddled by failed 60s radicals and creationist lunatics is par for the course.

The Chinese system is something you can think as a benchmark when evaluating the US system. I am not exaggerating, even the tea party, based on the Chinese standard, is a socialist group... In China nobody cares if it is equal, the only thing decision makers care if it is productive enough. China spend very litter resources in the pre-university education, and the logic is simple: it is some kinda useless but the chinese universities got lots of resources. Why? to get into a good Chinese university you have to take strict exam which filtered out who are not "smart" or "capable" then it seems a good investment only to spend money on the smart people. China is not a democracy so it doesn't have to "waste" resources on certain group of people which it thinks as "useless". In China, the decision makers only care things like: economy growth, rockets and satellites, new technology, of course together with gold medals in olympics. If you are a peasant labor and got your hand cut off by some machine at work, "who cares?" I watched one TV program from NHK(a japanese tv channel) documenting a chinese factory about the work-wounded workers, the owner of the factory just told the workers "go home and die" If you are a working class person in USA, you should try all your best to protect the US system, you all realize how lucky you are to work in such an euqal nation.

ShengweiMoney goes where it is valued. As a saver I want my money to be accessible to the largest number of possible APPRECIATORS. People who are interested in what I have. When a government makes everyone equal then my potential APPRECIATORS are very limited in how interested they can be in me. They are forced to be interested in hypochondriacs and reckless skydivers. Or football players. The taxes in china are much less than they are in America which enables like minded people to associate with each other. Thus "every shop one owner". In china private business is increasing, in USA private business is decreasing. Home ownership is also following this trend. You might say that now the Chinese can only buy one home. If so, you must remember when the inflation in house prices started. 2008 to 2010. Notice something here. I have several friends who do the foreign exchange in transmitting new deposits to the central banks reserves. ALL of the inflation was due to the united states bailouts of Wall Street banks. Agents (plain clothes banker puppies) were buying everything they could. We have one high profile example from Ireland Shawn Fitspatrick and his family. This was so wide spread that the Chinese gov had to step in to protect the Chinese people. This same thing happened in 1938-39 with the aftermath of mariner Eccles silver purchase. Nobody wants communism. NOBODY. But As Milton Friedman noted with a pseudo- Gold standard. Nations will do horrible things to each other. China is the land of plenty. There is no place on this earth as beautiful or spectacular as china. But the use of counterfeitable money forces people to leave the land of real things, living things, to go to a land of death, where there are no families. Where parents tell their children to go to the bank for an opportunity. Go into debt for an opportunity when capital accumulation in theory should stop this Devilish practice. Where is our accumulated capital. ? Why don't the parents have the ability to invest in their own children in America ? Economics is much more than just responding to shocks. Shocks are exactly that. When economists just look at numbers they loose perspective of the big picture. It is the difference between value investing and chart analysis. Americans are chart analyzers. Chinese have families. And family is the only way to survive the attacks / SHOCKS of counterfeiters.

Mankiw once linked to a website promoting intelligent foreign aid, specifically free mosquito nets. These nets (and de-worming children) improved educational outcomes with statistical significance. New schools and books did not. Poor children, especially minority children, probably do not succeed in becoming "un-poor" as adults on average because of higher than average premature births, associated learning disabilities, poor nutrition, and broken house holds. Things like adverse impact are probably baked in (e.g., for minorities on the SAT, bar exam, etc.). Of course, public K-12 schools must take them all. What evidence do you have that this fix (e.g., new schools or charter schools) makes a provable difference? Do Democrats have an obvious solution? No. I don't think it's found in throwing money at schools or adverse impact lawsuits. And you too I fear insist on deceiving yourself. Yes, fix the schools! (While taking away health care and food stamps?). Learn quantum physics or industrial welding instead! Well, how about starting by taking a ride through the South side, you teach a first grade class; report back if you make it. "Adverse impact will be there on the SAT 12 years from the date you finish teaching the kids." I'll guarantee it, betting $ to donuts (creme filled please), even if you become mayor, governor, and president thereafter.

Look up the Perry project or the abcderian (sp?) project, scientists collected much of the data you are talking about and we can see that educating young children has enormous returns and is relatively cheap. Broken households are a big impediment to the development of early life skills, but they are not insurmountable.

On the other hand, forbidding teachers to use red-ink because it hurts 8th graders' self esteem is an institutional failure completely unrelated to the budget (and happens in Chicago). Children are often never told that they do not know how to read or write or do arithmetic until highschool at which point it is practically too late.

We don't need more mosquito nets in the southside of chicago, we need to end institutional racism propagated through terrible k-12 policies. My personal emphasis would be on j-5 and I would bet anything (because I spent a couple of years monkeying on the data listed above and tutoring children in the south side and know the answer) that the adverse impact would be diminished-though probably not completely disolved.

The bottom line is that we aren't facing insect dangers in Chicago, Dallas, New york, Los Angeles, Houston, Atlanta,... . We are facing one party local government politics that have made the same systematically poor choices across the nation.

I was speaking to foreign aid. The point was new schools and books (fixes) may do nothing, which was the case after rigorous peer reviewed analysis in India. On the other hand, mosquito nets and de-worming had statistically significant improvements. The study is very defensible.

I googled "Perry Project Peer Review". The very first link was to a pdf stating in part, "In some cases, however, these [Perry Project] findings were inconsistent or varied by the measure used, raising some uncertainty about their validity. Moreover, despite the obvious care the High/Scope team devoted to the evaluation, several major issues related to the random assignment process and data inconsistencies limit the confidence that can be placed in these findings. Although there have been replications of the project, they have not been rigorously evaluated."

I doubt the Perry Project's findings.

Chicago Public spent $11,333 per pupil in 2008, not cheap in my estimation. I regard it as expensive, greater than the state average, and the system provides questionable returns. Moreover, spend $24,000 per pupil, like NYC, and you will get the same outcomes. Have two party control, same outcomes.

I also do not believe charter schools would do better. I do not believe this professor would do better. I'm not defending, but blaming, both parties, one controlling or not. Fixes will be terribly difficult. Face the truth. I'd start by evaluting ideas to see what works through proper analysis supported by peer reviews. That's how true scientists work.

The paragraph you cite does not strongly contradict their findings. Rather it points out vulnerabilities in the experimental design. Continue reading in that chapter, you will find a response to several of these issues.

The Brad and Angelina example suggesting that Angelina's income from capital shouldn't be taxed really doesn't convince me. By choosing to save Angelina is choosing to have a higher lifetime income, she could gain the same increase in lifetime income from making an additional movie each year, why would you want to treat one of the sources of that additional income differently to the other?

I am originally from China. If you go to countries like China you ll see what is inequality. Ironically china claims to be a socialist nation. I love US in that it is more equal, though not perfect. US has more complicated incentive problems than nations like Sweden or Norway

1. Consumption distribution is more equal than income distribution2. Income growth over time is different from welfare growth over time3. Higher income workers get better benefits so excluding that from your measure of compensation makes things look more equal4. Europe uses more progressive benefits and less progressive taxes than us, so looking at income taxes alone makes us look more progressive

Yes i'm sure the general public has a solid grasp of all of that, as it's repeated so often in NYT and WaPo editorials.

You:

1. Read a paper that argues against things you find important, summarizing in a fairly compact and well sourced package the case of the "other side". 2. This caused an instant reaction in you, as is understandable. (Grumble grumble screw those guys that's totally wrong how dare they grumble grumble) This phenomenon is sometimes referred to as "butthurt". 3. Grew IRATE at Cochrane linking to it, expressing agreement with the central thesis, and increasing readership of said paper.4. Made no attempt to argue against the thesis of the paper, instead deciding to attack Cochrane for being... too happy? Seriously? And then saying "oh well we already knew all of that".

Even Saez/Piketty when doing the media rounds consistently ignore the various arguments that median household income growth is understated, usually citing the common figure of roughly 18% growth from the mid 70s to shortly pre-crisis. If they don't "already know that" then why would we expect more of anyone else?

A proper response (see: an actual response) would be to explain why those points listed don't cut against the "inequality is the biggest issue facing the country" style arguments.

I'm not grumbling. It's not "the other side" from my perspective. I agree with all those points (although I think a couple of them highlight how this paper is a little misleading). That's my point. What I'm a little surprised at is that Cochrane acts like this invalidates info on income inequality or that it's something particularly new.

re: "A proper response (see: an actual response) would be to explain why those points listed don't cut against the "inequality is the biggest issue facing the country" style arguments."

Well I don't think inequality is the biggest issue facing the country so I'm not sure why I would give that sort of response.

But if we're making comment suggestions for other people, I'd like to see someone explain why it makes sense to exclude benefits from compensation discussions or why we should only look at tax progressivity when looking at Europe. I can kinda see the case for looking at consumption in addition to income, but not instead of income. But excluding benefits and only looking at taxes? I don't get why you would even want to do that (or why you would be surprised to see what this paper sees if you did).

btw - I didn't "attack" Cochrane at all. I have a lot of respect for Cochrane. I did express a great deal of incredulity at how positive he is about the paper.

"Europe uses more progressive benefits and less progressive taxes than us, so looking at income taxes alone makes us look more progressive"

I would be interested in the source for your assertion that "Europe uses more progressive benefits" than the United States. It is true that most European countries spend more as a percentage of GDP on non-defense than the US does; however, is this spending necessarily "more progressive"? The European countries in which I have lived generally do not do means testing for much of the government sponsored programs such as education, health care, public social security, etc. If public education is free or dramatically subsidized, it is so for all and not just for those that have financial need. The same for health care (does the UK offer health care only to the poor?) On the other hand, the spending sides of the four largest US federal programs are definitely "progressive". SNAP and Medicaid very much so and Social Security and Medicare are progressive to a lesser extent (higher income folks pay higher premiums to enroll in some Medicare programs). Also, are you counting refundable tax credits as part of the "progressive" tax system, or does it fall under the benefit side? Do your statistics account for factors not normally figured into traditional studies of the progressivity of benefits? I'm thinking, for example, of the very real disparity with respect to tuition prices paid at universities (public or private) that discriminate based on income.

The distinguishing characteristic of the European model is not that it is necessarily produces less inequality (I reserve judgement as to whether that would necessarily be a good thing, anyway, if it reduces everyone's wealth--see Cuba, North Korea, Zimbabwe, Venezuela and the entire 70 year experiment with Eastern Europe, the Soviet Union and China) but it is most certainly more paternalistic.

"Higher income workers get better benefits so excluding that from your measure of compensation makes things look more equal;"

I wonder if you could also provide some support for this assertion?

It appears that you are writing about employer-provided benefits such as health care, child care, pensions, etc.

I'm sure that higher income workers generally get larger benefit packages (in nominal dollar terms) than lower income workers; however, for those employers who do provide such benefits, the effect on "progressivty" and hence inequality (as a coefficient) would tend to work in the other direction:

1. Health care benefits typically do not depend on salary level, but rather on family size. Thus, with respect to this benefit, lower income workers would tend to get a *higher* amount as measured by percentage of taxable compensation than the higher income cohorts;

2. The same should be observed, I think, for pension programs, albeit to a lesser extent. Due to monetary caps, this benefit should increase, not decrease progressivity. Also, ERISA makes it illegal, beyond certain parameters, to discriminate in favor of highly compensated employees.

The U.S. has replaced a lot of welfare with the Earned Income Tax Credit which results in negative income taxes for low-income persons. Europe still pays generous welfare benefits but taxes them. The net result is that the U.S. tax system is substantially more progressive. U.S. taxes are substantially lower on average than Europe also. Nonetheless, I think it is clear that taxation isn't an answer to inequality concerns whether they be real or imagined.

"Yes, consumption inequality might be different from income inequality, but the numbers totally ignore issues of borrowing (in case of poor people) and savings (in case of rich people). If poor people have to borrow to do their basic consumption, and the rich people can save even though their are consuming excessively, how is that comforting? Why should consumption inequality be a better measure of "inequality"?

I might ask the reverse question: why would measuring inequality by consumption be a *worse* method of measuring inequality than measuring it by income? True, if I am able to borrow to finance current consumption, this borrowing should reflect reduced consumption in the future. Likewise, if I choose to save, this reflects the ability to consume more in the future. One would think, over time, these effects would smooth out. Have you noticed that the study covered a 29 year period?

Also, I would think that the net effect of this "smoothing" would reflect an equality bias in favor of the current consumers rather than savers. As Cochrane (correctly) pointed out, savers will need to give back part of their future consumption to the government in the form of taxes on their savings. Debtors, on the other hand, get a tax subsidy for mortgage interest and student loan interest. Also, have you considered that some of that debt will never be repaid because discharged in bankruptcy or other forms of debt forgiveness such as mortgage writedowns? As far as "equality" is concerned, it strikes me that the ability to borrow works in the long run much in the favor of increasing the equality of the non-rich.

At the end of the day, what matters is not what is in the bank, but what is on one's plate.

The commentary article I posted does not explicitly address the poor vs. rich life expectancy, but does utterly destroy the general lie about USA life expectancies in general, and I'll be willing to bet it applies more generally.

the article just recycles the same types of arguments that the right has been using again and again in the recent past, which have mostly been refuted.

Examples:

1) Yes, consumption inequality might be different from income inequality, but the numbers totally ignore issues of borrowing (in case of poor people) and savings (in case of rich people). If poor people have to borrow to do their basic consumption, and the rich people can save even though their are consuming excessively, how is that comforting? Why should consumption inequality be a better measure of "inequality"?

2) Comparing "median disposable personal income" between the US and Western Europe is well-known to be misleading, as European states provide much more public goods. For example, US parents might have more "disposable income" than Europeans, but they have to save for their children's education (something which European parents don't have to do to the same extent). All the article does is to define "disposable" in a way that suits the ideological argument of the authors.

3) The argument against the capital gains tax ("Angelina and Brad") is just ridiculous. It starts with the assumption that two people with the same lifetime earned income should pay the same amount of lifetime taxes, and then concludes that a capital gains tax is unjust. But that is circular logic: the result is assumed in the first place. The point of people that argue in favor of a capital gains tax is that a strict distinction between "earned" income and "capital" income is not useful and also not practical. In the example, "Angeline" has a higher total lifetime income, and thus one can certainly make the argument that it is "fair" that she pays more taxes than Brad. Whether this is "efficient" or not is a different question.

4) "The top five percent pay 44 percent more in taxes than the bottom 95 percent, while 47 percent of tax filers pay no tax at all." Deliberately confuses taxes with income taxes. Those 47% of tax filer that don't pay INCOME tax pay a lot of other taxes (SS, Medicare, VAT, etc.). If you do a plot of "total income of top x%" vs. "total taxes paid by the top x%", you realize how nice it is to be rich in the US compared to most other places on the planet.

I could go on... It is really tiring to see all these nonsense arguments again and again.

I'm sorry, but pointing to median disposable income in comparing "living standards" between US and Europe is not what an economist should refer to as "fact-based". It is actually quite silly:

* As has been pointed out this is irrelevant since e.g. health care and education in most of the richer European countries is not paid for by disposable income since it is publicly financed via taxes(this is of course highly relevant, considering the level of health-care expenditure in the US). * Further, comparing average home size is not really that relevant either. This is very much endogenous w.r. preferences. * Further, adjusting for age of the population? Well, adjust for hours worked and the US will look significantly worse in comparison with the richer European countries. Perhaps we should add an economic value of leisure hours for the time e.g. Norwegians spend on their hobbies and interests when the americans need to be working. (GDP/capita PPP adjusted in Norway is $53,471 vs. $48,387 in the US, while average working hours (per year) is 1,426 in Norway vs. 1,787 in the US). The point is that you can always find an "adjustment" that will be beneficial for the ideological point that you wish to make. This is not a good approach for a reasonable and intellectually solid discussion.

Anyhow, above a certain level of threshold of GDP/capita I find this measure as a proxy for living standard rather uninformative and I think economists spend too much time on this aggregate and poorly measured variable. As an example, having recently moved back to Sweden ($40,394 GDP/capita) from Norway ($53,471 GDP/capita), with the same type of job at the same level, I cannot detect any significant living standard changes at all. I consume the same bundles of goods as before and save more or less the same. Perhaps the differences are seen at other percentiles of the incomde distribution (no idea), but I cannot see this as a particularly relevant measure when discussing international policy issues.

I understood that the discrepency between European and US GDP can be largely explained by differences in hours worked - i.e. the gap between the US and Europe when looking at GDP/hour is smaller than GDP/capita (even when adjusted for the age distribution).

Whether this (optimally) reflects the preferences of Europeans for more leisure, or (suboptimally) is the consequence of rigid labour market institutions (=>higher unemployment, at least until the financial crisis broke; fewer hours worked per week; longer vacation mandated by law) is open to question, but the difference between European and US standards of living is significanly overstated by the GDP numbers

I think everyone and here I include the right too misses out in clearly discussing the key issues with inequality. I mean just look at how biased we have become when someone above says these are nonsense arguments and that everything has been already refuted. If so could anyone shed more light on the following

1. How much of the inequality in a country is an outcome of fundamental inequality, crony capitalism and how much of it is because of the government. So at one end there are fat lazy people who prefer to sit at home watching TV and still get to live in a bigger house and drive a care. At the other end there are 20 year olds working 20 hours a day dreaming up new apps and dot come sites trying to become rich. This simple difference "should" not result in inequality ?

2. What is the trade off between inequality and overall prosperity and growth and employment. I mean Greece reduced inequality drastically but it now has 25% unemployment and is at the verge of bankruptcy. This trade off is irrelevant to be discussed using economics ?

3. US rules the world. To put it mildly. It gets the power to print money which the rest of the world bows down and accepts. What are the costs it has to pay ? Free riding by the world on its military ? Free riding on technological innovations specially life saying drugs and healthcare ? I mean what is the mis pricing between how much the world benefits from US and the price it actually pays it ?

I mean these are the real issue about inequality. And trying to measure what inequality more accurately is only a start. The left trying to frame the entire discussion only based on trivial issues is simply a clue a tell about how the left would prefer the discussion not to head in these directions.

As a tax lawyer, two factors which I have never seen discussed when discussing increasing income inequality. First, the measure of income is taxable income, or AGI. The impact of the changes in the tax laws in 1986 which eliminated passive losses and thus most tax shelters are not accounted for. You cannot compare the base income of 1980 (or 1979) where that income could (and for high income taxpayers was ) reduced by tax shelters with the income of post 1989 (the passive loss rules were phased in). Second, you cannot do cross country comps, as the high income taxpayers with business interests in most developed countries use corporate holding companies in which the income is currently taxed at a lower rate, and when paid out to the owner receives credit for the corporate taxes paid. In the US because their is no integration of the corporate system, individuals use flow through structures which causes the income of top earners to be much greater than if said income were reported by a holding company.

One note....you need to define income. Having lived in both the UK and Holland....their income tax allows almost no deductions. The US tax code allows almost infinite deduction and knowing what a Goldman or billionaire pays in taxes show that just using the rate is laughable. We need a flat income tax or an asset tax. Offshore money for decades or deferring capital gains should be reversed indexed. The average worker gets the shaft under our system

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.

About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!